Gearing Up at REI

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Dennis Madsen knows what makes employees loyal. Thirty-six years ago, he answered a want ad for part-time work stocking shelves at Recreational Equipment Incorporated. The company so suited him that he stayed on, working his way through high school and college, even returning to REI during his leaves from military service. Today he is president and CEO, leader of the 6,300-employee, $735 million cooperative that has built its reputation selling specialty gear to campers, hikers, climbers, and others with an appetite for high-end outdoors equipment. Though the company has had to tighten its belt in a tough economy, it continues to attract passionate customers and employees, more than 2 million of whom share in its profits as members. HBR’s Gardiner Morse spoke with Madsen about REI’s culture and the business of running a cooperative. Following are edited excerpts of their conversation.

For the sixth year in a row, REI has turned up on Fortune’s list of the 100 best companies to work for. What’s your secret?

It’s all about getting the culture right. Employees can get benefits and incentives anywhere, but it’s harder for them to find a place where they can totally immerse themselves in the culture. We attract outdoors-oriented employees who sustain the culture and attract even more like-minded employees. They share the same interests and values; they’re committed to the environment, to the community, to work-life balance, and to having fun outside. And that goes for management, too.

The culture originated with the founders. Sixty-five years ago Lloyd and Mary Anderson started REI out of their love for the mountains and their loyalty to their mountaineering friends. They set up REI as a cooperative—so rather than making money off their friends, they returned the profits to customers as a patronage dividend. The first item they imported was an ice axe, because the one Lloyd bought here in Seattle broke the first time he used it. He was pretty upset. Having reliable gear is a matter of life and death for climbers. So that’s where the focus on trustworthy equipment came from.

Material benefits and incentives are also an important part of the mix. We try to align the incentives with the culture. For instance, most of our employees like the gear we sell. They use it themselves. So we offer them “challenge grants” as a way to win equipment. One employee or several of them together submit an application describing an outdoor challenge they’d like to pursue that they’ve never done before, like climb Mount Rainier or hike the Appalachian Trail, and the gear they would need to do it. We judge the applications according to how much of a personal stretch the challenge is for an employee or group. And if the application is approved, the company gives the individual or the team free REI equipment. We gave away $30,000 worth of gear and clothing last year.

Most companies would say they’re just like REI—driven by values and focused on employees and the community. Is REI really so different from any other retailer?

A crucial point is that we’re a cooperative; we’re owned by our customers. Anyone can be a customer of course, but millions of our customers who want to share in the profits pay a onetime membership fee and receive special offers and a refund based on the value of their purchases. Clearly, employees are important to corporate culture, but so are our customer-owners. When you’re owned by third-party investors whose only stake in the business is the money they’ve invested, then senior managers have to focus on earnings per share and the impact of quarterly reports on share prices. They need to generate profits at any cost, grow at any cost. I have watched this take a toll on some well-known brands in the outdoor-equipment industry, where management’s decisions weren’t in the long-term interests of the brand and the position it holds in the market. But when customers are owners, their interest is not solely about earnings. They’re interested in seeing good products and prices at their stores.

Still, you have to be profitable and grow.

Being a cooperative doesn’t mean we aren’t profit driven. We have to control our top-line growth and expenses and be accountable for a bottom line that is not only going to pay the dividend to our owners but also show a profit at the end of the year. Outdoor-equipment retailing is very competitive, and we have to operate this business with the same rigor that a traditionally organized business does. It is what we do with our profits that’s different, and that allows us a more mid- to long-term focus. I’m not so worried about what this quarter is going to look like versus last quarter, so I can stay focused on maintaining consistent product quality and service rather than on how I am going to make my numbers in the short term. That’s good for customers.

Like any for-profit business, you’ve had to make unpopular operating decisions—closing stores and moving some manufacturing operations outside the United States. How do you talk to employees about their concerns?

I spend most of my time staying in front of employees, engaging them in dialogues. The executive team and I do quarterly “town hall” meetings with groups of 200 employees at a time, where 40 minutes of the hour is devoted to Q&A. Employees won’t always tell you what’s on their minds if they’re forced to raise their hand in a public forum. So we leave three-by-five-inch index cards and pencils taped to every chair in the auditorium. Employees can write their questions, the cards are collected and brought up, and we answer them on the spot. This type of forum can put you on the hot seat, but it certainly opens up communication and builds trust. We also have a Q&A section on our intranet. I get hundreds of questions a month from employees all over the country. And some of these questions have ultimately led to policy changes. We’re not just paying lip service to open communication.

REI was a pioneer in on-line retailing. Any Web blunders along the way?

I was very enthusiastic about the Web, and the company jumped in with both feet. In general, on-line retailing has been phenomenally successful for us. Our Web-based sales were doing so well that we decided to discontinue our catalogs in 2000 and send customers directly to the Internet. Boy, did we hear about that! The customers weren’t ready. And so we scrambled to reinstate the catalogs. The lesson is to be careful not to get too far ahead of your customers. Be measured. Balance your enthusiasm with careful research.

Have you ever had a close call in the outdoors?

Yeah, being a climber, I’ve had my share of falls. I once broke through a snow bridge and fell into a crevasse in a glacier on Mount Adams. I nearly pulled my rope mate in with me, and I knew we were in a very serious situation. Fortunately, he was able to stop the fall and pull me out. Mountain climbing is risky. You’ve got to be prepared for the unexpected—just like when you’re running a business. I use the analogy all the time. You set a goal. You assemble a team and equip and train them. Then you begin your climb. As you’re climbing, you assess your conditions: weather, supplies, the abilities of the team. And you’re constantly reassessing your odds and your strategies based on all those factors. I think the most important lesson businesses can learn from mountain climbers is that when things are going badly—when it looks like you just aren’t going to make it—you pull back and regroup at base camp. That’s not failure; it’s just common sense.

Mountain climbing is risky. You’ve got to be prepared for the unexpected—just like when you’re running a business.

A version of this article appeared in the May 2003 issue of Harvard Business Review.